Econ 202: Microeconomics Theory I

First Semester, AY 2023-24

Assignment 6: Demand III

1. Let the individual utility function be given by

U = x1 + ln ( x2 x3 )
Let p1 = 2, p2 = 1, p3 = ½, and y (income) = 10.
(i) Compute the matrices of own- and cross-price elasticities of demand by this household.
(ii) Verify Engel aggregation, homogeneity restriction and symmetry restriction.
(iii) Discuss the significance of the foregoing restrictions on demand elasticities (i.e., Engel
aggregation, homogeneity and symmetry restrictions) in analyzing individual preferences.

2. Consider an economy consisting of two households, A and B. The utility functions

are given by
U A = ln x1 + 2 ln x2
U B = x1 x2
Suppose the incomes and prices of the commodities are as follow:
yA = yB = 50
p1 = 1, p2 = 1
Now suppose prices change to p1 = 2, p2 = 1/3.

(i) Determine the consumption of households A and B before and after the price change.
(ii) Is the behavior of household A consistent with the strong axiom of revealed preference
(SARP)? How about household B?
(iii) Is the aggregate behavior of the households consistent with SARP? Explain.
(iv) Discuss the significance of the above results.

3. Consider the two demand functions

p2 y
x1 = x2 = −1 p2 < y
p1 p2
Integrate these demand functions to find the class of utility functions from which they are
derived.

4. Some indirect utility functions 𝜈! 𝑝, 𝑦! , such as those originating from a quasi-linear

preference relation, can be represented as a convex combination of individual i’s income,
𝑦! , as follows:
𝜈! 𝑝, 𝑦! = 𝑎! 𝑝 + 𝑏 𝑝 𝑦!
which are often referred as the Gorman form indirect utility function.
(i) Show that if the indirect utility function can be expressed using the Gorman form, then
all consumers exhibit parallel, straight wealth expansion paths at any price vector p. [Hint:
Use Roy’s identity.]
(ii) Show that if the indirect utility function can be expressed using the Gorman form, with
the same 𝑏 𝑝 for all individuals, then the associated expenditure function can be expressed
as:
𝑒! 𝑝, 𝑢! = 𝑐 𝑝 𝑢! + 𝑑! 𝑝 .